Growth in real wages set to outstrip inflation for first time in 6 years, says EY

The growth in wages is set to exceed inflation for the first time in 6 years, according to one of the UKís leading economic forecasters.

The EY argued that the recent extended period of low inflation has meant that the average income could rise at a faster rate than living costs by as early as later this month.

They also forecasted that the current strength of sterling coupled with continued levels of low inflation will likely mean that the Bank of England will retain interest rates at their current historic low of 0.5% till at least the last quarter of 2015.

There was also positive news on the UK economy, with the EY estimating that is will undergo a ìdecent but unspectacularî growth of around 2.9% this year.

However, the ITEM Club outlined that the majority of growth in the economy this year would be incurred by consumer spending, which has previously been identified as an ëunsustainableí manner to improve the economy.

ëEarly as Aprilí

The EY forecasted that wages will rise by 1.7% over the course of this year, whilst average annual inflation was estimated to be 1.6% for 2014.

“Until now the recovery has been financed by a fall in the amount households save, but it appears to be moving to a firmer footing,” said Peter Spencer, the club’s chief economic advisor.

“The consumer upturn will be given a boost from real wages and rising employment, while investment is finally kicking in.”

The EY also highlighted that an extended period of stumbling fuel, food and petrol prices, substantiated by the strength of the pound, should remedy the ongoing cost of living crisis which has seen worker wages ësqueezedí to the limit by raising expenditure demands whilst experiencing a reduction in actual value of their wages.

“We are set for a long period of low inflation as pressures from commodity prices… remain largely absent.”

‘Crucial lid’

The EY estimated that low inflation and the strong pound will prompt the Bank of England to retain interest rates at 0.5% until at least the latter stages of next year, despite growing pressure for them to prematurely increase them now and ebb the flow of the rapidly overheating property market.

However, the Item Club argued that new lending criteria set to be imposed by banks from April 26th will act as a natural check on demand in the housing market at present, as it will make it harder to acquire a mortgage than it has been in recent times.

It argued that the new regulations, that will see applicants having to pass two income tests against current and future repayments when interest rates rise, will be “crucial to keeping the lid on the market”, particularly in London.